Fees could reach a record $1.4 billion for lawyers, accountants and other professionals working on the Lehman Brothers Holdings Inc. bankruptcy, the largest in U.S. history.

The biggest winner will be New York-based law firm Weil, Gotshal & Manges, Lehman's adviser, with an estimated $209 million in fees, said Lynn LoPucki, who teaches bankruptcy law at Harvard University in Cambridge, Massachusetts. His projections are based on fees paid for other large bankruptcies, including the most expensive to date, Enron Corp.

Lehman, with debt of about $613 billion, will need a bankruptcy judge's approval for about $906 million in charges for professional services, LoPucki said. By comparison, court- approved expenses for the bankruptcy of Enron, the world's largest energy trader until its 2001 collapse, totaled $757 million, of which $149.4 million went to Weil.

``We're breaking new ground in the size of the fees,'' LoPucki said in an interview yesterday. ``Lehman is such a large case that there is a lot of money there. It's like the guy who robbed the banks because that's where the money was.''

LoPucki said the debtor will pay an additional $524 million of fees, most of which don't need prior court approval. These include fees to secured lenders and claims agents, as well as auditing fees unrelated to the restructuring.

Law firm Milbank, Tweed, Hadley & McCloy, also based in New York, could make as much as $58 million in its role advising the creditors' committee in the case, said LoPucki, who calculated the fees with Joseph Doherty, the director of the Empirical Research Group at the University of California, Los Angeles, law school, where LoPucki also teaches.

It breaks out this way:

Lehman asked Oct. 8 for court approval to pay Weil, led by bankruptcy partner Harvey Miller, $650 to $950 an hour for partners and counsel; $355 to $595 for associates; and $155 to $295 for paraprofessionals.

Milbank, as adviser to the creditors' committee, has requested $700 to $950 per hour for partners; $650 to $850 for of counsel; $275 to $670 for associates and senior attorneys; and $155 to $325 for legal assistants, according to court papers filed on Tuesday.

Quinn Emanuel Urquhart Oliver & Hedges, the law firm acting as special counsel to the creditors' committee, asked for $660 to $950 an hour for partners, $380 to $950 for other lawyers and $250 to $280 for professional staff.

Houlihan Lokey, as investment banker to the creditors' committee, requested $500,000 per month for the first six months and $400,000 for each month after. Houlihan also asked for deferred fees of 0.05 percent of the first $30 billion of unsecured recoveries and 0.035 percent of all unsecured recoveries in excess of $30 billion, according to the filings.

Does $325 per hour seem high for legal assistants? That has the firm grossing $650,000 on the legal assistant working 2,000 hours. (And, I think 2,000/year is conservative on a case like this).

If the traditional 1/3 1/3 1/3 rule applies (1/3 for salary, 1/3 for overhead, 1/3 for profit), legal assistants make $225,000 per year.

I don't practice in New York, but do they really pay legal assistants $216,000 a year? Maybe the overhead factor is much higher there. But, it seems like an awful high rate to approve for a legal assistant.

The $209 million to Weil makes little sense to me. At $500/hour on average, this means 418,000 hours, which means over 80 people working 100 hours/week for one full year. Can this deal really be that much work?

As a former big firm Bankruptcy lawyer, I have to say that the fees sought (and approved) in Bankruptcy Cases have gotten truly obscene. I've seen the hourly rates charged by Weil, Gotschal attorneys, and they are completely out of hand - attorneys with no more than 6 years experience charging $500 per hour, first year associates charging $250 per hour (and billing 3000 hours a year), some partners charging $800 or more an hour.

Anyone who has practiced law knows that law schools do not teach you how to practice - they just teach you the law. Even the very brightest first year associate spends the first 6 months just learning how to find their own ass, so to speak, when it comes to the practice of law, and will spend at least 6-8 hours accomplishing something which a 3rd year associate can handle in half an hour. But Weil Gotschall (and the other big firms - I'm not trying to pick on them, but that is the firm I have the most first-hand experience with) will bill first year associates' hours full bore, regardless of the efficiency of their work.

The big firms try to justify the fees by the supposed level of expertise that they bring to the case, and it may well be justified by the senior partners on really tricky issues (though even that is questionable when the senior partners bill any appreciable hours on fairly stright-forward issues like cash collateral orders, lift stay motions, or asset sales), but that claim simply will not square with the number of hours charged by younger associates on even the most mundane of tasks.

Anyone wondering why the biggest bankruptcies are invariably filed in the Southern District of New York or the District of Delaware needs to know just 2 facts: (1) The Debtor in a Chapter 11 case has fairly broad discretion in where to file under the Bankruptcy Venue Statute (28 U.S.C. 1408); and (2) The Bankruptcy Judges in New York and Delaware will exercise virtually no restraint when it comes to approving fees. It is like a marketplace where the attorneys get to choose where to shop; a Bankruptcy Judge who craves the exposure of presiding over the big cases knows that the best way to chase them away is to disapprove some attorneys' fees. There are some really perverse incentives built into our corporate bankruptcy system.

``We're breaking new ground in the size of the fees,'' LoPucki said in an interview yesterday. ``Lehman is such a large case that there is a lot of money there. It's like the guy who robbed the banks because that's where the money was.''

I can see that there is a lot of work for accountants, valuing the assets and determining which debts were secured in whole or part by specific assets. And perhaps for various professionals to sell the assets. Why does this bankruptcy require more legal work than the bancruptcy of Joe's Diner?

I just went back &read the story - $355 per hour for a first year associate???? I charge less than that and I have 26 years experience in Commercial Bankruptcy cases, including some fairly arcane and complex issues. Sorry, but that is just too close to defrauding the creditors. Maybe I need to double my rates.

Is the trick to bribe the bankruptcy judges? I don't live in NYC, but still think the rates for associates and paralegals are obscene. Whatever happened to protecting both the shareholders and the creditors? Definitely a gravy train for the partners in the firm.

I can see that there is a lot of work for accountants, valuing the assets and determining which debts were secured in whole or part by specific assets. And perhaps for various professionals to sell the assets. Why does this bankruptcy require more legal work than the bancruptcy of Joe's Diner?

I can see right off the bat that Lehman Brothers is going to raise a whole lot of issues that you'll never see in a Joe's Diner Bankruptcy, like unravelling all of the money transfers between and among Lehman and all of its affiliates, not to mention determining the extent and nature of conflicts of interest among all the affiliates (though that probably won't stp Weil Gotschall from representing all of the debtor affiliates, even though the Bankruptcy Code seems to provide to the contrary), determining which of those transfers were preferences or fraudulent transfers, dealing with foreign transactions, trying to figure out and preserve (if appropriate) the tax attributes of assets or equity, analyzing issues of trust funds and commingling on collateral deposits, including dealing with constructive trust claims, analyzing complex derivitive securities and the underlying contracts, etc., etc. Some of these issues are purely legal, some purely accounting (like tracing funds for constructive trust claims), most are mixed issues. I'll bet you the Brooklyn Bridge that the accountants &lawyers will double bill on most, if not all of the mixed legal-accounting issues.

Why does a bankruptcy need a high-priced New York City law firm? Firms in other cities charge much less.

Understand that a Chapter 11 Bankruptcy is the ultimate "bet the company" litigation. The best defense that a Corporate Officer or Director has against claims of actionable negligence or breach of fiduciary duty is to say "I hired the very best lawyers and accountants I could find." Cost savings are simply far down the list of considerations when you are a Board Member voting on putting the company into Chapter 11, when any shareholder or creditor with the filing fee and a lawyer can file suit against you for mismanaging the company.

The indefensible fees described in the story should nicely stoke the growing cynicism of "ordinary" Americans towards the "extraordinary" Americans who make up the Washington/Wall Street cabal. It would be interesting to see the demand for the services of lawyers (and accountants), like those who are about to cash in on the carcass of Lehman, be subjected to actual market forces, rather than created by legislation. No doubt legal fees would dramatically decline as the wealth skimming class desperately tried to convince the wealth creators that their services were still needed and relevant, while many thousands more wealth skimmers would have to find another way to make a living.

Honyocker, why are you so sure professional fees aren't set by market forces? It seems to me those fees are about what those firms normally charge their paying clients, who are free to hire anyone else. Evidently the clients think they're getting something worth having.

Should the professionals have to accept lower fees because they're working on a bankruptcy and must get court approval? Wouldn't that be interference with the market?

DiverDan:The best defense that a Corporate Officer or Director has against claims of actionable negligence or breach of fiduciary duty is to say "I hired the very best lawyers and accountants I could find."

What if the claim of actionable negligence is that said Corporate Officer failed in his fiduciary duty to the creditors and shareholders of the company by squandering all of its resources on lawyers' fees?

It would be interesting to see the demand for the services of lawyers (and accountants), like those who are about to cash in on the carcass of Lehman, be subjected to actual market forces, rather than created by legislation.

Yeah, this was perplexing to me too. They could have hired whatever law firm they want at prevailing market prices.

You know, the creditors are absolutely and entirely free to hire some lawyers from Podunk to represent them, but they never do. They always hire someone like Milbank or Quinn Emmanuel. Seems like the free market to me.

And I assure you, as a partner at a big firm, that the first year associates are not that profitable. And yet, the competition with other law firms forces us to pay them 160K to 200K, or we can't hire any first years at all. That's the free market, and I, unlike Prof. Zywicki, am not one who complains about what the free market chooses to pay other people.

I'm pretty impressed by Milbank's estimate of the $325/hour paralegals! Their work is sure a much better deal than the $355 first-year associates, since the first-years will take three times as long to do it one-third as well.

Those fees are obscene. Especially the paralegal and 1st year associate fees. I think they get away with them because there aren't any fiduciary duties, really. The common stockholders will never recover anything. Most likely preferred are getting nothing or pennies on the dollar. The only people who have an interest in recovery are the unsecureds. Management just wants to keep getting paid as long as possible. If the BK judges aren't going to substitute their judgment then who is going to step in and say the fees are outrageous? Other lawyers? Of course we won't. Because hte higher Weil's fees, the higher ours can be.

Until Delaware law changes and it becomes easier to soak management with personal liability or jail time(which will never happen), then this is just the way it goes. Companies are run for management if they are public. The managers take high risks, get the rewards, get paid if they fail, and insure themselves against claims for breach of their duties to the extent they can. I really don't know why anyone wants to invest in 95% of listed companies. I do know why people want to become senior management - if there is a better gig out there, I'd like to see it.

I just hope that they are done before Barack Hussein Obama takes office.. the socialist tax increases they may suffer is SUCH a disincentive for them to want to put in hours..

I hadn't thought of how an increase in the high-end income tax (to the extent that fancy lawyers can't figure out how to structure their income in such a way to evade the tax) would upset the balance between various legal firms.

The bankruptcy court should follow the local state court system for appointed counsel in serious felony cases. That would probably mean $30-100 an hour with a cap of $500 to $5000, depending on the jurisdiction. When appointed counsel complain that the money isn't enough to attract qualified counsel or to pay for the amount of work actually required, courts and county budget officials inevitably say, "well, we have enough people willing to take the cases."

Or better, maybe appointed counsel in criminal cases should get paid like bankruptcy attorneys.

On another note, as the AIG executives found out, these cases will get a lot more scrutiny than they used to get. Charging fees like this just invites legislation limiting fees. Do bankruptcy lawyers want to be treated like appointed lawyers in criminal cases? They're on the right track.

I should have said. . . Maybe what they need is a Debtor's Public Defender office. I bet you could staff a very nice office with very qualified people for <i>a lot less than</i> $1.4 billion.

Absent that, bankruptcy lawyers and law firms should be required to disclose their income, assets and liabilities the way many low-level government employees have to. That and applying public records laws to the transactions might help catch conflicts of interests.

One of my biggest bitches about the Enron bankruptcy was that it was adjudicated in New York. Consequently, billions of dollars in legal fees was paid to New York lawyers when it could have been paid to Houston lawyers.

I looked at our rates and we charge $300 per hour for first year lawyers in our Houston office. Our rates are determined based on what our peers charge. When you pay these guys better than $160,000 for their first year's work, you gotta recover that somewhere.

Large bankruptcies are very lucrative for law firms. The bankruptcy lawyers fight very hard for these jobs.

DiverDan: The best defense that a Corporate Officer or Director has against claims of actionable negligence or breach of fiduciary duty is to say "I hired the very best lawyers and accountants I could find."

I agree. But my question is: why is the judge approving such payments? The judge isn't subject to such claims.

Why doesn't a bankruptcy judge only approve half the fees and say to the debtor - "go out and find the best you can for this amount - it may not be in the top 10 of the AmLaw rankings, but #100 in the rankings should be 90% as good".

A.S., I don't know that there is a Constitutional problem with your plan (no one has a Constitutional right to file for bankruptcy, I guess), but it seems awfully unfair to tell debtors that they can't hire lawyers as good as the ones the creditors get.

It's amazing to me the level of envy that people feel no shame in expressing. Why don't all of the commentators who are raging at what NYC lawyers make get a a life? More specifically, why don't you either (i) get a job at a NYC biglaw firm, if you can, or (ii) analyze what failures of your own have precluded that option?

"I would think it would be the reverse -- the best lawyers go to NYC where they can subsequently charge the most."

But the main reasons for the high New York lawyers fees are the high cost of doing business, and the high cost of living in New York. So in effect the client is paying for the largess of the New York City government. Why would they want to do this?

As someone said earlier, debtors file in SDNY and Delaware to avoid mid-market judges that complain about New York market rates. This attitude by judges, which your comments encourage, hurts Houston. Certainly there's some very talented Birmingham lawyer out there who thinks your $300/hr is outrageous? As long as the Houston bar and its judges hassle big firms about their rates, your oil &gas companies are filing for bankruptcy elsewhere.

wm13: Is it unfair that the debtors couldn't hire lawyers as good as the ones the creditors get? Perhaps. But you need to weigh that against the unfairness to the creditors who are footing the bill for the debtors' high priced counsel. The point of requiring the judges' approval of fees is to ensure fairness for the creditors, no?

Also, I don't think that your second paragraph was aimed specifically at me. But, just in case it was, FYI I am a partner in an AmLaw 100 firm in NYC (although my billing rate is still less than the top Weil associate rate). So envy of those NYC lawyers doesn't apply to me. My only point is that I'd bet my firm could do just about as good a job as Weil for, what, 50%? 75%? of the cost they are charging. It seems to me that a bankruptcy judge ought to keep that in mind.

You've been working for 26 years and charge less than $355 an hour? Where do you work--Czechoslovakia?

If you're serious the naivete is somewhat stunning. Some time talking to lawyers in small towns in states that aren't on the eastern seaboard, Texas or California might be well spent.

A lot of general practice lawyers would dream of charging that much hourly, although plaintiffs lawyers might occasionally make that much on contingency. Insurance defense local counsel small towns often have to fight to charge anywhere near that much. Even lawyers for businesses in an area would get laughed out of offices if they said their rate was $500 an hour.

The reason Weil gets these fees through the bankruptcy court --apart from the firm's vast experience in handling big bankruptcies, which is undeniable--is that most of the bankruptcy judges in NYC once worked at one of the big NYC firms, so they think the fees are fine. It also feeds on the view that some NYC lawyers have that they are smarter than every other lawyer in the US, so they can charge more.

Misspelling "underemployed" is probably not the best way to be noticed by a recruiter. Besides, unless you went to a top 20 school (regardless of the reason you went to the law school you did or any other qualification), you are obviously a moron.

Bob from Ohio: Actually, top New York firms drop unprofitable practice areas all the time. Weil Gotshal and most of the firms mentioned in this article, for instance, don't do public finance, because municipal issuers don't want to pay top rates. I am not sure about Weil, but most firms of that character either don't do trusts and estates, or have only non-partners doing the work. Many firms at the Weil level don't do real estate (although Weil does). The list goes on.

Obviously, it would be possible to make debtor's counsel's work unprofitable enough that top New York firms wouldn't do it. Other than spite and envy, though, I don't know why people are so hot for that result. I really have trouble believing that everyone here is concerned about Lehman's creditors, who are mostly other large financial institutions.

Misspelling "underemployed" is probably not the best way to be noticed by a recruiter. Besides, unless you went to a top 20 school (regardless of the reason you went to the law school you did or any other qualification), you are obviously a moron.

Ah, but apparently it IS the best way to be noticed by a fussy commentator on a blog. So in that sense I've accomplished something. Also I was unaware that the obviousness of my moronicity was completely evident from one comment on one blog in the vast intertubes. I'll have to work on disguising it better. Unless of course you are joking, in which case I suppose I am also a moron for not getting it.

it seems awfully unfair to tell debtors that they can't hire lawyers as good as the ones the creditors get.

Well, it's not the debtors' money anymore, is it?

As someone said earlier, debtors file in SDNY and Delaware to avoid mid-market judges that complain about New York market rates. This attitude by judges, which your comments encourage, hurts Houston. Certainly there's some very talented Birmingham lawyer out there who thinks your $300/hr is outrageous? As long as the Houston bar and its judges hassle big firms about their rates, your oil &gas companies are filing for bankruptcy elsewhere.

This admits the forum shopping for fees. It also shows that Congress needs to adjust the law to deter debtor attorneys from putting their own interests first (as you basically admit they do).

Many of the people in this thread don't even seem to understand that Lehman was not bailed out by the government. Uh, guys, that's why they're in bankruptcy.

But bankruptcy is a government function. Also, given the bailouts, we taxpayers are basically backing up a lot of the creditors.

Again, as the AIG executives found out, people are watching more closely. Government needs to keep an eye out when people have a blank check on someone else's checkbook.

Obviously, it would be possible to make debtor's counsel's work unprofitable enough that top New York firms wouldn't do it.

"Unprofitable" or just "no longer obscenely profitable"? If debtors can get equivalent counsel at lesser rates, creditors should not have to pay the higher NY rates.

To sum up: When you are paying your own lawyers with your own money, you can pay as much as you want for whomever you want. When someone else is picking up the tab, that person gets a say in how much you pay.

The people defending $1.4 billion in fees also show how wrong Chief Justice Roberts was to want more big firm lawyers on the bench. Apparently, SDNY judges are letting firms write themselves billion-dollar checks from other people's accounts because the judges, ahem, understand the profit needs of big firms. If that's true, we need a lot more judges with common sense about legal fees and quality legal work.

How bad this do you think this looks to your typical nonlawyer? Well it looks about three times that bad. I guess it will take at most a half dozen more cases of this magnitude to spark a substantive backlash. Hmm, I wonder what form it will take (and whether it will be confined to bankruptcy lawyers:-)

Old joke. Guy walks through a graveyard and sees a headstone that reads: Here Lies a Lawyer and An Honest Man. "Strange," he says to himself, "that they would bury two men in one grave."

Congress or the DOJ needs to take a close look at the personal and professional finances of all involved in SDNY, including judges, firms, and individual lawyers.

It looks like SDNY judges authorize payments to law firms that are completely out of whack with what almost every other bankruptcy judge (outside of Delaware) would authorize. Why is that? Have the judges come from these firms? Do the bankruptcy do a term or two and then get on the firm's payroll? Do they get gifts (including meals and "seminars" at resorts) from the attorneys they channel billions to?

Maybe the judges are just honest outliers on the compensation issue. If that's the case, Congress still needs to investigate to see what legislative changes are needed to deter debtor's counsel from forum shopping for higher fees.

SDNY bankruptcy judges remind me of those few local trial judges where plaintiffs lawyers loved to file mass tort actions. The judges may have honestly believed they were just following the law, but it gave the justice system the appearance of corruption. That kind of appearance of corruption can only be dispelled by investigation that proves that all is above board or by real change.

But the main reasons for the high New York lawyers fees are the high cost of doing business, and the high cost of living in New York. So in effect the client is paying for the largess of the New York City government. Why would they want to do this?

Because the best lawyers can get away with charging those high prices and so do. NYC has gotten itself into the best position -- being able to tax those that want to live near the center of the action where all the money is.

Because the best lawyers can get away with charging those high prices and so do. NYC has gotten itself into the best position -- being able to tax those that want to live near the center of the action where all the money is.

And that leaves open the question of why SDNY bankruptcy judges allow debtors to inflict those abnormally high fees on creditors.